HireQuest (NASDAQ: HQI) has had a rough month with its share price down 21%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on HireQuest’s ROE.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company’s success at turning shareholder investments into profits.
Check out our latest analysis for HireQuest
How To Calculate Return On Equity?
The formula for ROE ice:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for HireQuest is:
25% = US $ 12m ÷ US $ 47m (Based on the trailing twelve months to December 2021).
The ‘return’ is the income the business earned over the last year. So, this means that for every $ 1 of its shareholder’s investments, the company generates a profit of $ 0.25.
What Has ROE Got To Do With Earnings Growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea about the growth potential of the company. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that do not have the same features.
A Side By Side comparison of HireQuest’s Earnings Growth And 25% ROE
Firstly, we acknowledge that HireQuest has a significantly high ROE. Additionally, the company’s ROE is higher compared to the industry average of 17% which is quite remarkable. As a result, HireQuest’s exceptional 26% net income growth seen over the past five years, does not come as a surprise.
As a next step, we compared HireQuest’s net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 16%.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock’s future looks promising or ominous. Is HQI fairly valued? This infographic on the company’s intrinsic value has everything you need to know.
Is HireQuest Making Efficient Use Of Its Profits?
HireQuest has a three-year median payout ratio of 26% (where it is retaining 74% of its income) which is not too low or not too high. So it seems that HireQuest is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that’s well covered.
Along with seeing a growth in earnings, HireQuest only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.
On the whole, we feel that HireQuest’s performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. Having said that, the company’s earnings growth is expected to slow down, as forecasted in the current analyst estimates. Are these analysts expectations based on the broad expectations for the industry, or on the company’s fundamentals? Click here to be taken to our analyst’s forecasts page for the company.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take into account your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.